Economic Fluctuations, Unemployment, And Inflation

The rate of unemployment is one of the key concepts in macroeconomic theory. The fact that a person is unemployed simultaneously translates into a loss for this person, his or her family as well as his or her country as a whole. Unemployment is usually analyzed as a trend in order to evaluate the macroeconomic fluctuations, economic stability of a country and the overall macroeconomic snapshot of a particular economy. It is logical to analyze the rate of unemployment, since the it is in a given country, the more people in it work to the common macroeconomic benefits of the country and the less social expenses the government has to incur in a form of various unemployment benefits. Nevertheless, the level of unemployment is a very complex concept, which includes multiple controversial aspects. Thus, a quick view on the data regarding the level of unemployment may give a rather confusing picture a positive state of affairs, while the actual economic situation might explain the numbers quite differently. This essay applies the macroeconomic concepts of unemployment and economic fluctuations to the real-life economic situation of the USA through an analysis of the article “Unemployment Rates Are Far Below US Level in 16 States” (Rugaber, 2016).

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The article presents its author’s point of view on the situation with the rate of unemployment in the US in May. The main idea of the article is that the unemployment rate in 16 US states fell less than the national average of 4.7%. The author’s main idea is that low unemployment rates in many states may form a basis for wage growth. The article presents data on the unemployment rate in different US states. For example, he mentions that many of the states with low unemployment are relatively small. South Dakota, which belongs to the states with a small population, had an unemployment rate of 2.5%, the lowest rate in the whole country. Arkansas recorded the lowest unemployment rate since 1976, standing at the level of 3.8%. The states demonstrating a similar picture, where the rate of unemployment is substantially lower than the national average of 4.7% are New Hampshire (2,7%), Nebraska (3%), and Maine (3,5%). Nevertheless, there are bigger much states, like Colorado, Minnesota, Virginia, that also have relatively low rates of unemployment. The author mentions that those big states contain the major industries of the US economy.

In particular, Colorado has an impressive information technology sector. Minnesota is famous for its strong medical industry. Virginia contains many federal government workers and contractors. The author suggests that when businesses have to work with less “supply” of the labor force (lower rate of unemployment means that fewer people are in competition for a given position), they tend to increase the wages in order to attract potential workers to their positions. The author of the article also mentions that the average hourly wage rose 2.5% compared to the figure from the last year. At the same time, the nationwide rate of hiring has actually slowed down. This increase is lower than the targeted 3.5% calculated by economists as the required pay rate increase to guarantee the healthy economic growth. But, the author mentions that it is still higher than the number of roughly 2%, which was the characteristic of the 7-year long recovery from the Great Recession in the economy. Thus, the author strives to demonstrate that current data does not show a bad picture. Even though these numbers are far from optimistic, they are likely to guarantee a steady rate of macroeconomic growth, which is a better state of affairs than what the USA had a few years ago.

The article analyzes three main concepts – the rate of unemployment, the change of an hourly wage, and the business cycle. The author of the article suggests that two concepts are interdependent and gives a substantial amount of attention to a particular correlation. At the beginning of his reasoning, he supposes that a decrease in the rate of unemployment in May is a possible stimulus for the employers to offer higher wages, aiming at attracting potential new employees. As there is less interest for a given position (unemployment rate is lower, thus less people are in search of a job), the competition among the employers for prospective employees becomes stronger. The logical result of this competition is an increase in the hourly wages. However, the reasoning of the author seems a little questionable, as he analyzes only the two numbers, without providing any explanation as to how these numbers are formed, what stands behind the numbers and what are the implications of the changes in the data.

According to the US Bureau of Labor Statistics, a person is considered unemployed if he or she does not have a job, while having actively searched for a job in the last four weeks, and is currently available for work. Besides, people who have been temporary laid-off and waiting for reentering into the job market are also classified as unemployed. The data on employment is published each month for the previous month. The US Census Bureau recalculates the numbers of unemployed people on the basis of the monthly Current Population Survey (CPS). The survey interviews 60,000 eligible households every month. Next, the US Bureau of Labor Statistics analyzes the data and publishes the results (BLS, n.d.). The rate of unemployment is calculated as the number of unemployed people divided by the size of the country’s (or state’s) labor force. Thus, now that we know the criteria for considering a person unemployed, we need to perform an analysis of the formation of the labor force. The labor force is the sum of the employed and the unemployed citizens. However, the employed and unemployed people do not form the whole population of a country. There is a group of people who are not considered in the calculation, as they are officially not a part of the labor force.

There is a difference between the civilian population and the civilian labor force. This group includes those people who are retired and disabled, students and household workers. Besides, it includes the discouraged workers. If a person does not currently have a job and has not been actively searching for a job in the last four weeks, such a person is not a part of the labor force. Thus, such a person does not have employment, but at the same time the US Census Bureau does not treat such a person as unemployed. . The US Bureau of Labor Statistics defines these “discouraged” workers as “marginally attached to a labor force”. Thus, when we see an unemployment rate of 4.7%, we actually can only analyze the situation regarding those people who were actively searching for a job within the 4 last weeks. On the other hand, this figure provides no information regarding those people who have been looking for a job for more than 12 months, or those people who have not been actively seeking employment opportunities(apply for positions, call friends and employment agencies, etc. in the last four weeks). And it is, in fact, the first issue to pay attention when we look at unemployment rates as unemployment numbers may fall while there may be millions of people who are marginally attached to a labor force and are not included in the unemployment data.

The second significant issue is the number of newly created jobs in the economy. If the total rate of unemployment falls along with the number of created jobs, there are grounds for additional research and analysis. If the economy works correctly, a decrease in unemployment will be accompanied by creation of new jobs. Otherwise, there is is a question of where those workers who were counted as unemployed in the previous period, but now are employed (as the percentage of unemployment decrease) have found jobs, if the supply of jobs has decreased. In this light, we may predict that lowered level of unemployment rate along with the lowered supply of created jobs is a warning signal. Most likely, the unemployment rate has fallen because the part of the unemployed went to the category of marginally attached to the labor force.

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Another important characteristic is the hourly wage. The author of the analyzed article focuses on the correlation between the average hourly wage and the phase of the business cycle. In particular, the author suggests that the 7 years of the recovery from recession were marked with a low rate of wage growth and high rate of unemployment. Thus, the increase in the pay rate is the sign of the recovery from recession. So, according to the macroeconomic concept of business cycles offered in the Chapter 8 (Gwartney et al., 2015), the decrease in the unemployment rate and the increase in the wage rate are the signs of the expansion (the next phase that follows recession). However, again, the expansion should be characterized by the real GDP growth and creation of the new jobs. What is more, the unemployment rate number does not include those, who work at part-time jobs because their full-time placement was cut. The Employment Situation Summary suggests that the number of people who work part-time increased by 468,000 to 6.4 million in May (BLS, 3 June 2016). If we look at the real GDP growth, the numbers say that the predicted GDP growth for 2016 is around 2%. The Bloomberg article suggests that the first quarter of the year started with the disappointing figures in GDP growth. The GDP growth of 0,7% for the first quarter is the weakest result in the last two years (Jamrisko, 2016). Thus, we may conclude that the decrease in the unemployment rate is not the optimistic sign by itself. The analysis of the additional factors suggests that it is a rather negative trend.

To conclude, it is essential to point out that the author of the analyzed article (Rugaber, 2016) supports the idea that the decrease in the unemployment rate in May is a good sign of the economy’s recovery. The author also predicts an increase in the average hourly wage. The analysis of the unemployment rate using macroeconomic concepts suggests that a decrease in the unemployment rate is not necessarily accompanied by a sustainable rise in number of newly created jobs and growth of real GDP. Besides, the number of part-time employees also increased in the last month. This may mean that the situation on the job market is not that optimistic. There is a possibility that the number of marginally attached to the labor force people increases. The increase in part-time employees suggests that people cannot find the full-time job even if they would like to. Thus, the unemployment rate is not always a reliable predictor for the overall macroeconomic stability and wage increase, as suggested by the author of the article. Rather, it is important to look at the economic situation from various perspectives.

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